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Budget 2017: Will the Income Tax Exemption Limit be Raised?

To alleviate the common man’s sufferings and minimize any adverse impact of demonetization on day-to-day lives, the Finance Minister has already hinted in his speeches that income tax slabs could further be increased, lowering the tax burden on taxpayers due to higher revenue being collected on account of cashless systems.

The FICCI and ICAI have sent their pre-memorandum budget proposals to the Hon’ble FM, in which it has been proposed that the government should consider raising the income tax exemption limit as follows:

Basic exemption limit be increased from Rs.2.5 lakh to Rs.3 lakhs.

Income from Rs.3-10 lakhs be taxed at 10% (currently the slab is Rs.2.5 – 5 lakhs).

Income from Rs.10-20 lakhs be taxed at 20% (currently the slab is Rs.5-10 lakhs).

For income beyond Rs.20 lakhs, the tax rate should be 30%.

If this happens, it would truly be great news for taxpayers, resulting in tax savings of maximum up to Rs.155,000. This will leave them with more money for savings and investments.

To illustrate with an example –

Mr. A has a taxable income of Rs.6 lakhs. Under the current tax rules, he pays no tax on the first Rs.2.5 lakhs of his income.

Of the remaining Rs.3.5 lakhs, Rs.2.5 lakhs fall under the Rs.2.5 – 5 tax slab, for which he pays 10% as tax. This amounts to Rs.25,000.

The remaining 1 lakh falls in the 5-10 slab, and will therefore be taxed at 20%. This amounts to Rs.20,000.

Mr.A’s total tax liability is Rs.45,000 (Rs.20,000+25,000).

Under the proposed tax rate:

Mr. A would pay no tax on the first Rs.3 lakhs. The remaining 3 lakhs will fall in the Rs.3 – 10 lakhs tax slab, for which he pays 10% as tax. This amounts to Rs.30,000

Mr. A would end up saving Rs.15,000 in tax under the new tax regime!

Similarly, If Mr. A has a taxable income of Rs.10 lakhs, he would end up saving tax up to Rs.55,000. In case Mr. A has an income of Rs.20 lakhs, he would end up saving up to Rs.155,000 in taxes (assuming the proposed slab rates*)

Slab*

Proposed Slab Limit

(Rs. in Lakhs)

Proposed Tax Rate

Category I

0-3

NIL

Category II

3-10

10%

Category III

10-20

20%

Category IV

Beyond 20

30%

In the words of the honorable FM- “What you need is a broader base of economy, for which you need a lower level of taxation.” Therefore, we could be in for a pleasant surprise if the current slab rates are introduced in this year’s budget.

PS: To compensate for the revenue loss due to increased slab rates, the government might think of doing away with the current tax rebate of an amount of Rs.5,000 that is available to taxpayers having an income of up to Rs.5 lakhs.

Therefore, a person with an income of Rs.5,00,00 would end up paying taxes to the tune of Rs.20,000, whereas under the current income tax slab there was a rebate of Rs.5,000 available.

(For ease of calculation the rates do not include cess)

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